Pension Income Splitting

in Pensions

Let me preface this by stating that I think Canada should adopt a combined family income model for taxation. In this model spouses could combine their income and then income split on the basis of that. As part of my retirement plan, I hopefully, will be able to use Pension Income Splitting (from T1032, joint election of split pension income).

Pension income splitting has been around for over 10 years. So far no government has tried to curtail the use of this tax avoidance tool. Who can use this powerful tool? Only couples with pension income, or pension-like income vehicles, and typically these couples will have one spouse that has a higher rate of income.


How does Pension income splitting work?

The arithmetic involved is quite simple: I can give up to 1/2 of my entire pension income to my wife and have it taxed at her rate of taxation. While this might raise my wife’s tax bracket, it will lower mine as well. My current estimates show that I might save up to $600 a year by pension income splitting.

The program is quite simple, all I need do is fill in the form T1032 when I submit my taxes. I can then opt out the next year, by not submitting that form in my taxes. Splitting your CPP income with your spouse is much more complicated (but can be done as well).

Pension Splitting

Pension Income Splitting is Bad For Canada?

The C.D. Howe institute has published a report that claims that income splitting will, “… infect your soul, curve your spine, and keep the country from winning the war…” (to paraphrase George Carlin). I am not sure exactly why there is a big hate-on for this program, as you can do similar things if you create a Spousal RRSP (but you have to do that far in advance of your retirement).

The major reason I can take advantage of this program is that my spouse has a small pension. If we both had the same income level, pension income splitting would make no sense.

I am hoping the Liberal government (or future governments) do not put the kibosh on this program, as they did on Combined Family Income.

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